House prices in Australia's capital cities are threatening 'negative growth' in 2018

After starting in Sydney earlier in the year, Australia’s housing market slowdown now appears to be spreading across Australia.

According to CoreLogic’s Home Value Index for December, dwelling prices fell by 0.3% last month on an average weighted basis, dragged lower by falls in Sydney and Melbourne, Australia’s largest and most expensive housing markets.

Prices in capital cities fell by 0.4% while those in regional areas rose by 0.2%. By type of dwelling, prices for houses and units both fell by 0.3%.

“In 2017 we saw growth rates and transactional activity gradually lose steam, with national month-on-month capital gains slowing to 0% in October and November before turning negative in December,” said Tim Lawless, head of research at CoreLogic.

“Nationally, dwelling values were 4.2% higher over the 2017 calendar year which is a slower pace of growth relative to 2016 when national dwelling values rose 5.8% and in 2015 when values nationally were 9.2% higher.”

Lawless said the slowdown was being driven by price movements in capital cities which fell 0.5% over the December quarter, masking a 0.5% rise in regional areas over the same period.

This table from CoreLogic shows price changes by individual capital over the month, quarter and year.

Source: CoreLogic

Fitting with the theme seen in prior months, the weakness in December was yet again led by Sydney, Australia’s largest and most expensive city.

“Sydney’s housing market has become the most significant drag on the headline growth figures,” says Lawless.

“The city’s annual rate of growth is now tracking at just 3.1%, a stark difference to the recent cyclical peak when values were rising at the annual rate of 17.1% only seven months ago.”

From the recent peak in August 2017, prices in Sydney have now fallen by 2.2%.

Contributing to the national weakness, prices in Melbourne also fell for the first time since February 2016 in December.

“The city’s housing market has been far more resilient to negative growth compared with Sydney due to factors such as stronger population growth, lower affordability hurdles and a higher rate of jobs growth,” said Lawless.

“However, the growth trend has been clearly moderating since late 2016 and Melbourne’s annual rate of capital gain, at 8.9%, has fallen below double digits for the first time in eleven months.”

With prices in Sydney and Melbourne falling 0.9% and 0.2% respectively, it managed to offset price gains in most other Australian capitals and regional areas during the month, leaving the national price decline at 0.3% in weighted terms.

And, with prices flat in October and November, that saw quarterly price growth turn negative for the first time since early 2016.

“The 0.3% fall in December was the catalyst for dragging the quarterly capital gains result into negative territory for the first time since the three months ending April 2016,” said Lawless.

By individual city, prices Sydney fell by 2.1% over the quarter, offsetting gains of between 0.1% to 3.1% in all other capitals aside from Darwin over the same period.

That Sydney-led weakness saw the annual pace of growth slow to 4.2%, less than half the annual rate reported in the first half of 2017.

However, as seen in the chart below, that trend could well reverse in the coming months should prices in Sydney and Melbourne continue to weaken.

Source: CoreLogic

To Lawless, it probably will, with the trends of late 2017 likely to be repeated in the year ahead.

“In 2018, the housing market performance is likely to be significantly different relative to previous years,” he says.

“We’re likely to see lower to negative growth rates across previously strong markets, more cautious buyers, and ongoing regulator vigilance of credit standards and investor activity.”

And, unlike 2016 when two interest rate cuts from the Reserve Bank of Australia (RBA) acted to reignite the east coast housing market, Lawless says the price weakness on this occasion is likely to be more entrenched.

“We’re not likely to see a similar lifeline thrown to the housing market this time around via lower interest rates or loosening credit conditions,” Lawless says.

“Regulators are likely to be keeping a close eye on credit trends with particular focus on investment credit and interest only lending, and the next move in interest rates is more likely to be up not down.”

Lawless says that he expects softer housing market conditions in 2018, driven by a continuation of the slowdown that is clearly evident across Sydney and, to a lesser extent, Melbourne.

“While the headline figures are set to weaken, below the surface the individual cities and regions of Australia will continue to operate under their own distinct cycles which are subject to more localised forces of demand and supply,” he says.

For those looking for more granular detail on price movements by individual capital city, this table from CoreLogic looks at price movements by time frame and type of dwelling.